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Into the Great Unknown; Stress Testing with Weak Data

Author

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  • Li L Ong
  • Rodolfo Maino
  • Nombulelo Braiton

Abstract

Stress testing has become the risk management tool du jour in the wake of the global financial crisis. In countries where the information reported by financial institutions is considered to be of sufficiently good quality, and supervisory and regulatory standards are high, stress tests can be of significant value. In contrast, the proliferation of stress testing in underdeveloped financial systems with weak oversight regimes is fraught with uncertainties, as it is unclear what the results actually represent and how they could be usefully applied. In this paper, problems associated with stress tests using weak data are examined. We offer a potentially more useful alternative, the "breaking point" method, which also requires close coordination with on-site supervision and complemented by other supervisory tools and qualitative information. Excel spreadsheet templates of the stress tests presented in this paper are provided.

Suggested Citation

  • Li L Ong & Rodolfo Maino & Nombulelo Braiton, 2010. "Into the Great Unknown; Stress Testing with Weak Data," IMF Working Papers 10/282, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:10/282
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    References listed on IDEAS

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    Cited by:

    1. International Monetary Fund, 2016. "Argentina; Financial Sector Assessment Program-Financial Sector Stability-Technical Note," IMF Staff Country Reports 16/65, International Monetary Fund.
    2. Borio, Claudio & Drehmann, Mathias & Tsatsaronis, Kostas, 2014. "Stress-testing macro stress testing: Does it live up to expectations?," Journal of Financial Stability, Elsevier, vol. 12(C), pages 3-15.

    More about this item

    Keywords

    Loan classification; Stress testing; Ad hoc shock; breaking point; data quality; provision; banking; banking system; financial systems; risk management; banking supervision;

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